United States v. Generes, 405 U.S. 93 (1972)

United States v. Generes

No. 70-28

Argued November 8, 1971
Decided February 23, 1972
405 U.S. 93

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Syllabus

Respondent taxpayer owned 44% of the stock of a closely held construction corporation, with an original investment of 38,900, and received an annual salary of $12,000 for serving as president on a part-time basis. His total income was about $40,000 a year. He advanced money to the corporation and signed an indemnity agreement with a bonding company, which furnished bid and performance bonds for the construction contracts. The corporation defaulted on contracts in 1962, and the taxpayer advanced over $158,000 to the corporation and indemnified the bonding company to the extent of more than $162,000. The corporation went into receivership and he obtained no reimbursement for thee sums. On his 1962 income tax return, the taxpayer took his loss on direct loans to the corporation as a nonbusiness bad debt, but he claimed the indemnification loss as a business debt and deducted it against ordinary income and asserted net loss carrybacks for the portion unused in 1962, pursuant to 26 U.S.C. § 172. Treasury Regulations provide that, if, at the time of worthlessness, the debt has a "proximate" relationship to the taxpayer’ business, the debt qualifies as a business bad debt. In his suit for a tax refund, the taxpayer testified that his sole motive for signing the indemnification agreement was to protect his $12,000-a-year employment with the corporation. The jury was asked to determine whether signing the agreement "was proximately related to his trade or business of being an employee" of the corporation. The court refused the Government’s request for an instruction that the applicable standard was that of dominant motivation and charged the jury that significant motivation satisfies the Regulations’ requirement of proximate relationship. The jury’s verdict was for the taxpayer and the Court of Appeals affirmed, approving the significant motivation standard.

Held:

1. In determining whether a bad debt has a "proximate" relation to the taxpayer’s trade or business, and thus qualifies as a business bad debt, the proper standard is that of dominant motivation, rather than significant motivation. Pp. 103-105.

2. There is nothing in the record that would support a jury verdict in the taxpayer’s favor had the dominant motivation standard been embodied in the instructions. Pp. 106-107.

427 F.2d 279, reversed and remanded.

BLACKMUN, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART and MARSHALL, JJ., joined and in which (as to Parts I, II, and III) BRENNAN and WHITE, JJ., joined. MARSHALL, J., filed a concurring opinion, post, p. 107. WHITE, J., filed a separate opinion, in which BRENNAN, J., joined; post, p. 112. DOUGLAS, J., filed a dissenting opinion, post, p. 113. POWELL and REHNQUIST, JJ., took no part in the consideration or decision of the case.